Collected Wisdom

This week we look at Ten Network, Transurban, WorleyParsons, Bank of Queensland and Cabcharge.

Summary: The newsletters are generally switching off from the Ten Network in view of its poor returns, and have mixed views on toll roads operator Transurban. Last week’s restructure announcement from WorleyParsons is being viewed with caution, while Bank of Queensland’s acquisition of Investec’s finance and leasing business is regarded as positive. But the newsletters have concerns over taxi payments company Cabcharge as a result of changes by the NSW government.

Key take-out: Ten Network continues to struggle in a highly competitive television market, and the newsletters are turning off, with the network failing to build on its success after the winning the broadcast rights for the Winter Olympics and The Big Bash series.

Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Ten Network Holdings (TEN)

Newsletters are sceptical management can turn Ten Network Holdings around in the foreseeable future after reviewing the company’s half-year results last week.

At face value Ten’s results were an improvement: the television broadcaster posted a net loss of $8 million for the six months to February 28, compared with a net loss of $244 million in the previous corresponding period.

But last year’s interim results had been affected by licence write-downs and restructuring costs to the tune of $244.8 million.

Moreover, earnings before interest, tax, depreciation and amortisation (EBITDA) was down 71.2% to $10.1 million, driven by the rights and production costs for The Big Bash and the Sochi Winter Olympics.

Ten has failed to translate the higher costs from these two programs into higher revenue, newsletters say. While revenue climbed 4.4% to $315 million for the period, costs escalated around 14%.

The vast majority of analysts say Ten Network is a sell at current price levels. They don’t factor a recovery into any of their earnings forecasts due to the tough competition from Seven and Nine, the poor advertising market and the fact Ten has a lack of enduring content.

As multiple sources point out, Ten couldn’t build on the success of the Winter Olympics and The Big Bash, with audience ratings reverting back to previous levels soon afterwards.

And while ratings should spike again during the Commonwealth Games this year, in the meantime Ten is left in the cold as viewers swamp to Seven and Nine for Australian Rules Football (AFL) or the National Rugby League (NRL) – the two most popular sporting programs in winter.

* According to our value investor partners, StocksInValue, the intrinsic value for Ten Network Holdings is $0.17. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to sell Ten Network Holdings at current levels.

Transurban (TCL)

Newsletters are mixed over Transurban after the toll operator reported traffic and revenue data for the first three months of 2014.

Transurban told the market last Thursday that proportional toll revenue increased by 12.7% to $273.8 million, driven by strong traffic from the company’s Sydney network after the M2 upgrade and a typically solid performance from CityLink in Melbourne.

The consensus verdict on Transurban is not as positive as it was back in January, when Collected Wisdom last looked at the stock and the majority of newsletters rated it a buy. After climbing 7.8% to $7.36 since then to April 10 (when analysts revised their recommendations), the stock is roughly in line with the consensus target price, and more newsletters now say it is a hold.

However, the stock has drifted lower to Tuesday’s close of $7.07 following the latest developments.

Sources still optimistic about the stock say that on top of the current ramp up in revenue across Transurban’s roads, the company has a handy project pipeline still to come through the widening of the M5 and the NorthConnex project in New South Wales.

Further, the US assets and the Queensland Motorways provide the opportunity to establish a new platform growth.

But those more cautious say the stock appears fairly valued at its current price, highlighting that Transurban may need to raise between $750 million and $1 billion in fresh equity if it acquires Queensland Motorways.

One thing all sources agree on is that Transurban has excellent management conscious of both generating cash for distributions as well as long-term value generation.

Indeed, analysts on average forecast the yield to lift to 5.5% in 2014-15 from this financial year’s 5%.

* According to our value investor partners, StocksInValue, the intrinsic value for Transurban is under review. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold Transurban at current levels.

WorleyParsons (WOR)

The majority of newsletters have told their clients to not get too excited by WorleyParsons’ business restructure, given the number of obstacles the company still has to navigate in the short term.

The announcement WorleyParsons is reorganising its business into three lines – services (representing 70% aggregated revenue), major projects, and Improve – sent the stock up 6.9% $16.55 on Wednesday last week.

The restructure is a key change, sources say. The mining services company is shifting from its current structure based on three customer-focused divisions (hydrocarbons, infrastructure and minerals, metals and chemicals) to a serviced-based split across three divisions.

“The reorganisation is expected to improve major project performance, deliver sustainable growth in earnings and enhance returns to shareholders,” said chief executive Andrew Wood.

Detail on the restructure was light, apart from the $35 million worth of costs to be recognised this financial year.

Newsletters are divided between buying and holding the stock following the proposed restructure, but more believe it appears fully valued at current levels. While the restructure positions WorleyParsons as a leaner business to cope with difficult market conditions, analysts believe the possibility of another earnings downgrade could still be a key theme this year, with the profit warning last November still fresh on their minds.

WorleyParsons also confirmed its guidance for underlying net profit of between $260-300 million in the announcement. However, one source says that, for the company to achieve this, underlying earnings before interest and tax (EBIT) margin would have to lift to between 6.1-7.6% in the second half, compared to just 6% in the first half.

At current share price levels, investors are being fairly compensated for near-term risks as well as the potential for long-term growth, another source says.

* According to our value investor partners, StocksInValue, the intrinsic value for WorleyParsons is under review. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold WorleyParsons at current levels.

Bank of Queensland (BOQ)

Bank of Queensland has bought Investec’s specialist finance and leasing business at a fair price and at the right time, according to the investment press.

The regional bank announced on Friday it had acquired Investec’s $2.4 billion loan portfolio for $440 million, the same day it posted record half-year results where cash earnings surged 17% to $140.2 million and the half-year dividend leapt 14% to 32 cents a share.

But while the half-year result was largely in line with consensus expectations, the acquisition – of which $400 million will be funded through a fully underwritten entitlement offer – came as a surprise.

“The acquisition provides BOQ with an opportunity to obtain a leading position in attractive specialist segments, delivering access to a client base consisting primarily of medical, dental and accounting professionals,” said chief executive Stuart Grimshaw.

Newsletters say the acquisition diversifies BOQ’s business, provides synergies and enables it to buy more growth at a time when its franchise turnaround has mostly played through. On the other hand, several highlight that the acquisition, while material, isn’t enough to make a big difference to earnings.

Following the developments, newsletters are almost unanimous in advising their clients to hold onto BOQ. They point out that after surging 33% to $12.46 in the past year, the stock is priced at a price-earnings multiple of 13.5 times – at a similar level to the big four banks.

One source says BOQ is well placed to deliver growth in the medium term despite struggling to grow its loan book, particularly if lending growth in Queensland recovers to national averages. However, much of this potential earnings growth looks already priced in.

Another source says underlying growth may not matter if BOQ becomes a “serial acquisition” story. This is possible, the source says, given its high price-earnings multiple and management’s appetite for a variety of assets.

* According to our value investor partners, StocksInValue, the intrinsic value for Bank of Queensland is under review. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to hold Bank of Queensland at current levels.

Cabcharge (CAB)

Cabcharge suffered its biggest one-day drop in eight months last week when the NSW government announced its intention to cut the taxi service fee.

Shares in the taxi payments company fell 5.4% to $3.87 in response to the news. Cabcharge anticipates that if the New South Wales government does half the surcharge cap on credit and debit payments to 5%, as it intends, the company’s taxi service fee income could fall by around $14 million a year.

However, Cabcharge hopes to mitigate the loss by around $10 million by reassessing merchant fee arrangements with taxi networks and incentive payments made to drivers. An increase in electronic payments generally could also help, the company said.

NSW follows a similar regulatory change by Victoria in May last year that saw Cabcharge shares plummet 15.3% in one day – the most on record.

Following the news the majority of newsletters advise to sell Cabcharge, as the current share price levels don’t sufficiently account for its high regulatory risk and uncertainty. The impact of the regulatory changes by NSW and Victoria are being underplayed by the market and will plague the company for years, one source says.

Technological change is also threatening Cabcharge’s earnings ahead, according to newsletters. Smartphone booking apps take revenue from Cabcharge’s integrated payment system and open up competition.

While there was no comment from the NSW government about whether drivers need to be network affiliated, in Victoria the requirement has been removed. When combined with more customers using smartphone booking apps, sources say network revenues could be eroded significantly over the long term.

* According to our value investor partners, StocksInValue, the intrinsic value for Cabcharge is $4.19. To find out more visit http://www.stocksinvalue.com.au/.

  • Investors are generally advised to sell Cabcharge at current levels.

Watching the Directors

  • The Millner family were the biggest buyers again this week, this time spending $2,239,687 on Brickworks shares. The family, whose head Robert is chairman of the building products and investments group, bought 156,699 shares at $14.29 each.
  • Meanwhile, non-executive director, Raymond Barrow, traded $1,439,491 for 372,925 shares in cement manufacturer Adelaide Brighton.
  • On the selling side, Seven Group Holdings director, Bruce McWilliam, netted $1,838,994 from offloading 218,141 shares at $8.43 each in the media and industrial equipment company.
  • Elsewhere, Caltex chief executive, Julian Segal, generated $1,153,616 from selling 53,933 shares in the fuel supplier and retailer at $21.39 each.